Select Comfort Management Hosts Investor Day (Transcript)

Select Comfort Corporation (SCSS)

Investor Day

May 8, 2012 11:15 AM ET

Executives

Edwin Boon – VP, IR and Corporate Strategy

Shelly Ibach – COO and EVP, Sales and Merchandising

Kathy Roedel – EVP, Product and Service; Chief Technology and Services Officer

Wendy Schoppert – EVP and CFO

Analysts

Brad Thomas – KeyBanc

Budd Bugatch – Raymond James

Keith Hughes – SunTrust

Mark Greenfield – Sigma Capital

John Baugh – Stifel Nicolaus

Joshua Pollard – Goldman Sachs

Tom Bodor – UBS

David MacGregor – Longbow Research

Joan Storms – Wedbush Securities

Rick Fradin – Rail-Splitter Capital

David Ricci – William Blair

Kenneth Gau – Waddell

Sean Matlock – Kennedy Capital

Ethan Steinberg – Friess

Eric Hollowaty – Stephens Inc

Todd Schwartzman – Sidoti & Company

Presentation

Edwin Boon

Good morning. My name is Edwin Boon. I am Vice President, Investor Relations and Corporate Strategy. And my Sleep Number setting is a 50.

Thank you for coming to our presentation portion of Sleep Number Investor Day. Thank you for the opportunity to discuss our company with you, such an exciting company and we’re just starting. We hope that you really love the store visit today. Isn’t it a great store? Thank you for joining us on the webcast as well. Shortly, I’ll share highlights of our growth strategy with you and then we’ll follow that up with questions and answer session.

Our speakers today include Shelly Ibach, our current Chief Operating Officer, and Incoming President and Chief Executive Officer; Kathy Roedel, our Executive Vice President and Chief Technology & Service Officer; and Wendy Schoppert, our Executive Vice President and Chief Financial Officer. Please note that the recording and slides used in today’s presentation will be available in the Investor Relations section of our website at sleepnumber.com.

Please refer to the appendix of the presentation for a reconciliation of certain non-GAAP financial measures included in the presentation, or that may be discussed by management today. Today’s presentation, as well as our answers to your questions, may include certain forward-looking statements. These forward-looking statements are subject to a number of risks and uncertainties outlined in the forepart of the presentation and discussed in some detail in our Annual Report on Form 10-K and other filings with the SEC. The company’s actual future results may vary materially.

Now, let’s get started.

Shelly Ibach

Welcome. I’m Shelly Ibach and my Sleep Number is 35. Today we will answer the question why Sleep Number. One of my favorite Sleep Number stories is from just two weeks ago at our Presidents Circle, which is an annual summit of our top performers from across the country. Such diversity there, we had on one had a 16-year veteran with Sleep Number, a Store Manager who’s still setting records and then we had a first-year sleep professional selling over $1 million in his first year.

The comment thread with all of the top performers is their passion about improving people’s lives and their desire to help one another be successful. This mission-based team is focused on improving customers’ lives through individual Sleep Number experiences. This is the foundation of our company and what is really creating a great, great company for all constituents, employees, shareholders, suppliers and customers.

Thank you for joining us for a store visit today. We thought it was appropriate to begin the day at the heart of where everything happens, the magic of our store, where the interaction between the Sleep Professional and the store and the product and the customer all come together. We are unleashing Sleep Number’s growth through the strength of our integrated customer-focused strategy, our proprietary products, and our exclusive distribution, and our unique business model.

We are on the path to achieve our goal of more than doubling our 2011 sales and expanding operating margin to more than 15% by 2015. In my over 30-year retail career I have never been more confident about a strategy as I am about our strategy right now at Sleep Number. This confidence comes from our knowledge of the product combined with the unparalleled customer experience that we are delivering. And with our development, it just keeps getting better.

Manufacturers and retailers work hard every day to be relevant for their customers. At Sleep Number we had the unique ability to take a single concept and execute it in a fully integrated manner from pre-purchase to purchase, the product and service experience followed by continued brand engagement through subsequent communications and purchases. Who else can do this? Who else has control over every aspect of their brand experience?

It starts with a truly unique product, coupled with company-controlled retail experience. How many unique brand experiences are there like this, especially in large undifferentiated industries like the mattress industry? And we are just getting started.

The industry dynamic favors Sleep Number’s growth. For context setting let’s quickly review the industry, over $12 billion at retail, with projected growth of 7.1% over the next two years. Non-innerspring is clearly outpacing the industry growth. In fact, over the last eight quarters non-innerspring has accounted for 86% of the unit and 78% of the overall mattress industry growth.

With this pace, we are seeing the non-innerspring segment at an inflection point and expect continued share growth. In addition, there has been strong growth in premium, mattress price points greater than $1000. Premium now represents 47% of the industry sales, up from 41% in 2008. We believe Sleep Number is helping drive these shifts in the industry, and we are uniquely positioned to benefit from them with our premium non-innerspring product and exclusive distribution.

We are early in our growth journey and approximately, with just approximately 5% market share and less than 2% unit market share. And we are well positioned to continue to accelerate investment in our unique product and distribution. Consideration of the non-innerspring is now similar to innerspring, indicating the adoption of innerspring-alternative products. This consideration comparison is even more impressive given the fact that non-innerspring has been comprised of primarily premium price points to this point.

The consideration shift is consistent with the consumer trends related to health and wellness. Consumers are seeking quality products and contributing positively to well being. Our exclusive, or company-controlled, distribution allows us to lean into this opportunity and not be at risk of losing selling floor presidents who are focused on our product due to increased competition in the category. We don’t have that risk.

Sleep Number’s vision is to become the new standard in Sleep by individualizing Sleep experiences. Let me take a minute and speak to the individualizing. Consistent with the trends that we’ve all experienced in coffee, with Starbucks and Peet’s and Nespresso and some of those other brands, and the trends that we’ve seen with Apple, individualization is a key trend and that’s what Sleep Number has always been and is about, individualizing the experience which is broader than just the mattress for our customer. It’s inclusive of understanding what the customer desires and what their needs are and matching it with product that gives them a fully integrated Sleep experience.

To realize this vision, we’ve established five long-term goals. Our growth strategies support these consumer-centric goals and we will communicate our progress against these goals on a regular basis. As you may expect, our first goal is about awareness. Everyone will know Sleep Number and how it will improve their life.

And our second goal is about product. Innovative Sleep Number products will move society forward with meaningful consumer benefits. And our third one about distribution, Sleep Number will be easy to find and our customers will be able to interact with us how and when they want. And the fourth one, of course, is about the integrated experience. Customers will love Sleep Number and enthusiastically recommend Sleep Number to family and friends.

And finally and importantly, our fifth goal is about our advantaged business model. Leveraging our unique business model to fund innovation and growth will benefit our customers, our employees and our shareholders. Our strategy is integrated and focused on the customer. The best and most iconic retail brands today enable shoppers to succeed at interacting with the brand at every touch point and provide a consistent brand experience. This is what we are building at Sleep Number.

Our number one growth opportunity is awareness. While our bed was invented 25 years ago, our Sleep Number brand was developed just 11 years ago. And until 2010, we operated under two brands, Sleep Number and Select Comfort. Today we are all Sleep Number. Our August of 2011 study indicated our unaided brand awareness with just 15%. While this was a high point for us, it was less than half to a quarter of other leading mattresses brands. Our integrated growth formula was developed to address this challenge and we’ve made progress.

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